243 ECONOMIC AND BUSINESS REVIEW | VOL. 21 | No. 2 | 2019 | 243-274
ARE MIDDLE MANAGERS’ COST DECISIONS 
STICKY? EVIDENCE FROM THE FIELD
BYUNGHOON JIN
1
 Received: February 9, 2018 
JOHN C CARY
2
 Accepted: May 21, 2018
ABSTRACT: Anderson, Banker, and Janakiraman (2003) show that costs are “sticky” (i.e., 
costs change relatively less when sales decrease than when sales increase) because managers 
are reluctant to cut resources when sales decrease. We predict that cost behavior at the middle 
management level is sticky also when the magnitude of sales increase is sufficiently large, 
considering that middle managers have more limited ability in adding resources and are 
more risk averse. Using a survey instrument and interviews, we find evidence that middle 
managers’ cost decisions are sticky at both ends. Our findings are supported by empirical 
evidence based on segment-level data.
Key words: cost stickiness; asymmetric cost behavior; middle manager; resource allocation; budget constraints; risk 
aversion; business segments
JEL classification: M10, M41, D24
DOI: 10.15458/ebr.85
1 INTRODUCTION
Anderson, Banker, and Janakiraman (2003, hereafter ABJ) and subsequent studies in 
the management accounting literature document that costs decrease relatively less when 
sales decrease than they increase when sales increase by an equivalent amount; i.e., costs 
are “sticky”. While the literature explains such asymmetric cost behavior as a result of 
asymmetric cost decisions by managers, most studies in cost stickiness literature either 
examine cost behavior at the corporate level or focus on CEOs as decision makers. In 
this study, we focus on middle managers who have significant influence on the corporate 
strategy through day-to-day operational decisions and also have characteristics distinct 
from those of CEOs or other top managers. Unlike prior studies that rely heavily on 
archival data to examine cost stickiness, we take a behavioral approach and more directly 
ask middle managers in practice about their cost decisions, using a survey instrument 
and interviews in addition to a regression analysis. We find that middle managers’ cost 
decisions are sticky not only when sales decrease but also when the magnitude of sales 
increase is sufficiently large.
1 Marist College, School of Management, Poughkeepsie, USA, e-mail: byunghoon.jin@marist.edu
2 Corresponding author, Marist College, School of Management, Poughkeepsie, USA, e-mail: john.cary@marist.
edu

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 244
Cost decisions at the middle management level are important and thus worth examining 
because of two reasons. First, middle managers are more involved in the day-to-day 
operations of a company than top managers and are also likely to be the ultimate decision 
makers for the business unit and thus can have significant influence on the firm’s overall 
costs (Kanter, 1982). Second, at the same time, middle managers’ cost decisions are likely 
to be different from those of top managers because middle managers are likely to (1) have 
more limited ability in adding resources due to limited annual budgets and corporate-level 
policies or strategies to follow, which are typically set by top managers (Williamson, 1975; 
Mueller, 2003), and (2) be more risk averse because of their compensation structure, which 
is focused relatively more on fixed salary and less on incentives such as cash bonus and 
equity-based compensation.
To examine cost behavior at the middle management level, we conducted both a survey 
and field interviews, directly asking middle managers in practice to describe their 
decisions related to various types of costs, including overall SG&A costs, under various 
situations regarding the change in sales revenue. The analysis results based on the detailed 
interviews and 152 survey responses indicate that middle managers’ cost decisions are 
sticky when sales decrease (or, to be more accurate, when the magnitude of sales decrease 
is sufficiently large), consistent with the findings in the previous empirical studies, and also 
when the magnitude of sales increase is sufficiently large. To complement our behavioral 
findings, we also conducted an empirical analysis using segment level data. The regression 
results based on 26,050 segment/year observations support our prediction and behavioral 
findings.
Our study contributes to the accounting and management literature in several ways. First, 
using a survey instrument and field interviews, we provide direct evidence that managers’ 
resource capacity decisions are sticky, which supports the explanations in the previous 
studies based on empirical models and archival data (e.g., ABJ). Second, more importantly, 
we provide an additional insight that at least at the middle management level costs are 
sticky not only when sales decrease but also when a firm experiences a sufficiently large 
increase in sales revenue.
The rest of the paper is organized as follows. In Section 2, we review the prior literature 
on cost stickiness and middle managers and provide our research hypothesis. In Section 3, 
we describe the design and procedures of the survey instrument and interviews. Section 4 
presents our data and summary statistics. In Section 5, the results of the quantitative and 
qualitative analyses are presented, followed by the conclusion in Section 6.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 245
2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
2.1 Cost stickiness
The asymmetric cost behavior, called “cost stickiness, ” was first documented by ABJ. Using 
archival data spanning 20 years (from 1979 to 1998), ABJ showed that costs decrease less 
when sales fall than they increase when sales rise by an equivalent amount. ABJ argued 
that the fundamental reason for cost stickiness is that changing the levels of committed 
resources is costly. Adjustment costs include severance pay when employees are laid off, 
recruiting and training costs when new employees are hired, as well as organizational costs 
such as loss of morale among the remaining employees when colleagues are terminated. 
Because of the adjustment costs, managers will choose to retain unutilized resources 
to some extent when sales decline and there is uncertainty about the permanence of a 
decline in demand. In contrast, when demand increases beyond the available resource 
capacity, managers do not have as much discretion in adding resources because not 
doing so would result in losing not only current sales but also future sales because of 
disappointed customers. As a result of the asymmetry in resource capacity decisions, costs 
become sticky, i.e., costs decrease relatively less when sales fall than they increase when 
sales increase by an equivalent amount.
Consistent with this explanation, previous studies have shown that the degree of cost 
stickiness is related to macroeconomic factors and firm-specific factors which constrain 
resource adjustment. For instance, ABJ find that the cost stickiness is weaker when sales 
revenue also declined in the preceding period, stronger during periods of macroeconomic 
growth, and positively associated with the asset intensity and the employee intensity. 
Balakrishnan, Petersen, and Soderstrom (2004) find that the degree of cost stickiness 
is influenced by capacity utilization. Banker, Byzalov, and Chen (2013) focus on cross-
country differences and find that the degree of cost stickiness is increasing in the strictness 
of employment protection legislation, consistent with ABJ’s adjustment cost theory. 
While the literature explains the asymmetric cost behavior using asymmetric cost decisions 
of managers, behavioral factors affecting the cost decisions have been largely ignored in 
the prior literature. A few exceptions are Dierynck, Landsman, and Renders (2012), Kama 
and Weiss (2013), Chen, Lu, and Sougiannis (2012), and Banker, Jin, and Mehta (2018), all 
of whom focused, either explicitly or implicitly, on CEOs as the ultimate decision makers. 
Dierynck, Landsman, and Renders (2012), and Kama and W eiss (2013) find that incentives 
to avoid losses and earnings decreases or to meet financial analysts’ earnings forecasts 
managers expedite downward adjustments of slack resources when sales fall, lessening 
cost stickiness. Chen, Lu, and Sougiannis (2012) find that managers’ incentives to grow 
the firm beyond its optimal size or to maintain unutilized resources with the purpose of 
increasing personal utility from status, power, compensation, and prestige (i.e., empire 
building incentives) induce greater cost stickiness. Banker, Jin, and Mehta (2018) focus 
on managerial decision horizon and show that short-term cash bonus provides managers 
with incentives to cut more slack resources and thus induce less cost stickiness while long-

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 246
term incentives, such as stock option and restricted stock award, extend the managerial 
decision horizon and thus induce more cost stickiness.
2.2 Middle managers
While prior studies in the cost stickiness literature generally regard a firm’s cost behavior 
as a result of the asymmetry in the cost decisions either at the corporate level or by top 
management, many cost-related decisions, including employment, asset acquisition, and 
overall SG&A spending decisions, are made by middle managers, such as department 
managers and regional managers, especially in decentralized firms. Middle managers and 
their business decisions are important mainly because middle managers have significant 
influence on strategic decision making process of the company. Middle managers are more 
involved in the day-to-day operations of a company than top managers and are often said 
to have their fingers on the “pulse of operation” (Kanter, 1982). Because of their deep 
involvement into the day-to-day operations, middle managers have the opportunity to 
report valuable information and suggestions from the inside of a company (Likert, 1961), 
which makes them play a critical role in the corporate level decision making process. By 
using bottom-up management processes, they communicate information and propose 
issues for top management (Floyd & W ooldridge, 1994; Dutton & Ashford, 1993; Dutton et 
al., 1997).
3
 The significant influence of middle managers on corporate decisions, including 
investment in resource capacity decisions, suggests that firm-level cost behavior is also 
heavily affected by middle management decisions. 
What makes middle managers and their cost decisions even more important and thus 
worth examining is that middle managers have characteristics distinct from those of 
top managers. First, middle managers are likely to have more constraints in the decision 
making process than top managers. The primary responsibility of a middle manager is 
to implement a strategy, set by the top management, in an effective and efficient manner 
(Floyd & Wooldridge, 1997; Huy, 2002; Delmestri & Walgenbach, 2005). During the 
implementation process, however, middle managers tend to have limited ability in adding 
resources, including human resources and long-term assets. Such a limit is typically set 
by top managers only. Managerial discretion arises, at least partly, from the authority 
to allocate the funds of the company to pursue their own interests (Mueller, 2003). This 
suggests that if middle managers are given too much power on resource allocation and 
pursue their own interests, for example, performance of the department, fewer resources 
or funds will be left for top managers who have their own interests, for example, company-
level performance (Fama & Jensen, 1983; Eisenhardt, 1989). Thus, top managers tend to 
restrict middle managers’ ability and monitor their behaviors in order to prevent middle 
managers from wasting the resources of the company and thereby limiting the top 
management’s ability to utilize such resources (Williamson, 1975; Mueller, 2003).
3 For more insights into middle managers’ involvement in the strategy or decision making process, see Burgelman 
(1983), Floyd & Wooldridge (1992a, 1992b, 1997, 1999), Huy (2001, 2002), Kanter (1988), Westley (1990), and 
Wooldridge & Floyd (1990).

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 247
Another distinctive characteristic of middle managers is that they are generally more risk 
averse than top managers because their future is narrowly dependent on their current 
tasks (Eisenhardt, 1989; Gomez-Mejia & Balkin, 1992; Shimizu, 2012). According to the 
agency theory, principals use various forms of non-salary components in the compensation 
package, such as cash bonus or long-term equity incentives, to provide risk-averse agents 
with incentives to take risk (Jensen & Meckling, 1976; DeFusco, Johnson, & Zorn, 1990; 
Murphy, 1999; Rajgopal & Shevlin, 2002). However, the portion of non-salary incentives 
is substantially smaller for middle managers compared to CEOs and other top managers 
(Belcher & Atchison, 1987), suggesting that managerial decisions of middle managers are 
likely to be more risk averse than those of top managers.
2.3 Research hypothesis
The distinctive characteristics of middle managers suggest that cost behavior at the middle 
management level may look different from that at the company or top management level. 
In specific, the cost stickiness theory assumes that companies’ or top managers’ ability to 
add resources are relatively less limited than their ability to cut slack resources, and as a 
result the relation between sales change and cost change is kinked at the point where sales 
change equals zero, as illustrated in Figure 1A. On the other hand, the middle managers’ 
ability to change the level of cost or investment is limited for both adding and cutting as 
discussed above. In addition, middle managers, who are relatively more risk averse than 
top managers, are less likely to increase cost or investment substantially when the company 
or the business unit experiences a huge increase in revenue, concerning the permanence 
of the increase in demand. Based on this intuition, we formulate our main hypothesis as 
follows:
Hypothesis: Middle managers’ decisions to change the level of cost or investment are 
“sticky” when the magnitude of sales change is sufficiently large.
In other words, we predict that at the middle management level, costs change relatively less 
not only when sales decrease (or when the magnitude of sales decrease is large), but also 
when the magnitude of sales increase is sufficiently large. This suggests that the relation 
between sales change and cost change at the middle management level is expected to be 
kinked at two different points as illustrated in Figure 1B. The main objectives of this study 
include (1) examining how costs behave at the middle management level (and especially 
if the cost behavior is consistent with our prediction) and (2) providing an explanation for 
the observed behavior based on qualitative information obtained through the survey and 
the interviews.

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 248
Figure 1: Graphical illustrations of SG&A cost behavior
Note: Figure 1A, drawn based on the theory of Anderson, Banker, and Janakiraman (2003), illustrates the 
asymmetric SG&A cost behavior, “cost stickiness”. The relation can be described as SG&A costs changing 
relatively less when sales decrease than when sales increase by an equivalent amount. The line is kinked at % 
change in sales revenue = 0. The y-intercept is not necessarily zero.
Figure 1B illustrates the behavior of SG&A costs at the middle management level. The non-linear costs-sales 
relation can be described as SG&A cost changing relatively less when the change in sales revenue is sufficiently 
large in magnitude. The flatter parts at both ends are not necessarily parallel to each other.
3 METHODOLOGY
3.1 Surveys and interviews
To examine the characteristics of middle management cost decisions and also to 
complement prior studies in the cost stickiness literature, we use a combination of a 
survey instrument and field interviews in this study. The prior literature on cost stickiness 
relies heavily on archival firm-level data. The main advantage of using archival data is 

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 249
that it enables researchers to perform relatively objective analyses based on historical 
real data. As discussed by Graham, Harvey, and Rajgopal (2005), however, studies based 
on archival analyses can also suffer from several weaknesses related to model/variable 
specification. In most cases, a regression analysis cannot be entirely free from model/
variable misspecification or measurement error. Sometimes it is also difficult to develop 
a good economic proxy. Another weakness of archival studies is the inability to ask 
qualitative questions. In contrast, surveys and interviews provide an opportunity to ask 
managers very specific and qualitative questions about the motivation behind managerial 
decisions without relying on potentially misspecified regression models (Graham, Harvey, 
& Rajgopal, 2005). On the other hand, potential caveats related to surveys and interviews 
include subjective or biased inputs from survey respondents or interviewees.
In this study, we mainly use a combination of a survey instrument and field interviews for 
the purpose of complementing those archival studies in the prior literature. Specifically, 
surveys and interviews enable us to examine the characteristics of middle managers’ 
resource capacity decisions without worrying about any model specification issues which 
have been previously addressed in the literature (e.g., Balakrishnan, Labro, & Soderstrom, 
2014; Banker & Byzalov, 2014). In addition, surveys and field interviews provide us with 
an opportunity to identify factors affecting managerial resource capacity decisions, which 
are not easily identifiable using archival data. Considering the potential caveats associated 
with surveys and interviews, we also conduct an empirical analysis based on archival data 
as an additional analysis to back up our main findings from the surveys and interviews.
4
3.2 Research design
We developed a survey instrument based on a review of the cost stickiness literature. 
In specific, we designed the main survey questions to ask how a manager’s decisions to 
adjust overall SG&A expenditure, as well as the capacity level of individual resources, 
including human resources, long-term assets, raw materials and merchandises, vary under 
hypothetical scenarios regarding sales change. In addition, qualitative questions were 
asked to identify limitations in the resource capacity decisions and other affecting factors. 
The survey contained 25 questions including: 13 questions about respondents and their 
companies and 12 quantitative and qualitative questions addressing their cost decisions.
The interviews were designed to obtain more detailed qualitative information about 
decision behavior at the middle management level, as well as impact factors and limitations 
in the decision making process. The potential interviewees were contacted using our 
personal network, a basic introduction was provided through a telephone/email briefing 
and then the 25 survey questions were sent. The main telephone interviews asking about 
detailed decision-making mechanisms were conducted about a week after the survey 
questionnaires were sent.
4 See Section 5.3 for the detailed model and sample data for the empirical analysis.

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 250
4 DATA
We used the Cint service to recruit 175 U.S.-based respondents who were identified as 
middle managers.
5, 6
 After manually identifying 23 responses with an error (e.g., using dollar 
amounts instead of percentages) and spam responses, 152 valid responses remained for 
quantitative and qualitative analyses. Table 1 presents self-reported summary information 
about demographic characteristics of the sample companies and respondents. The survey 
gathered information frequently used in empirical research for subsample analyses to 
consider potential conditioning effects.
Table 1: Summary statistics
5 Cint is a market research company which has access to a large number of preregistered members who vary in 
demographics and other social characteristics (e.g., occupation or title). Once a client selects a target respondent 
group, Cint sends the client’s survey until it collects a predetermined number of responses. Our survey was sent 
to 459 middle managers in the U.S. and completed by 175 of them (i.e., the response rate was 38.3%).
6 In the survey, a qualifying question asking respondents to self-identify their job title was also included.
Panel A – Demographic characteristics of sample companies (n = 152)
Avg. sales revenue for past 5 years Percent Years of operation Percent
< $200,000 4.6 0-5 years 3.9
$200,000 - $500,000 7.9 5-10 years 25.0
$500,000 - $1,000,000 17.8 10-20 years 28.9
$1,000,000 - $1,500,000 21.1 20-30 years 21.7
$1,500,000 - $2,000,000 15.8 > 30 years 20.4
> $2,000,000 32.9
SG&A as % of sales revenue Industry
0-5% 3.9 Construction 17.8
5-10% 21.7 Manufacturing 15.1
10-20% 27.6 Transportation and Utilities 5.3
20-30% 23.0 Wholesalers and Retailers 7.9
30-50% 16.4 Financial Services 12.5
> 50% 7.2 Business Services 17.8
Consumer Services 13.8
Number of employees Public Administration and Other 9.9
≤ 10 2.6
11-50 18.4
51-100 17.8
101-500 28.9
> 500 32.2

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 251
Note: Table 1 presents demographic characteristics of sample companies (Panel A) and managers (Panel B).
Revealing the dollar amount of total annual compensation was optional. 151 out of 152 respondents chose to 
answer this question.
For the mean calculation, all amounts greater than $150,000 were treated equal to $150,000. Considering only 
six out of 151 valid responses were $150,000, the effect of potential understatement is expected to be minimal.
Panel A of Table 1 presents descriptive statistics of the sample companies. Our sample 
companies range from small to large in terms of average sales revenue and number of 
employees. In specific, 30.3% of the sample firms were relatively small with less than $1 
million of average sales revenue, while 32.9% were relatively large firms earning more 
than $2 million of sales revenue per year. Also, 32.2% of the firms had more than 500 
employees. For more than half of the companies, SG&A costs were between 10% and 30% 
of sales revenue, comparable to the statistics reported in the previous archival studies (e.g., 
ABJ). Most of the companies (96.1%) have operated for more than five years. The industry 
Panel B – Demographic characteristics of sample managers (n = 152)
Primary responsibility Percent Gender Percent
Hiring 5.9 Male 64.5
Purchasing 7.2 Female 35.5
Production 15.1
Sales & Marketing 11.2 Age Ye ar
Accounting & Finance 11.8 Mean 39
Administration 19.1 25
th
 percentile 32
General management 29.6 50
th
 percentile (median) 36
75th percentile 42
Experience at current position
0-3 years 15.1 Total annual compensation $ thousand
3-5 years 21.7 Mean 82.6
5-10 years 40.1 25th percentile 60.0
10-15 years 17.8 50th percentile (median) 80.0
> 15 years 5.3 75th percentile 100.0
Experience in current industry Composition of compensation package 
(as % of total comp.)
Avg. Percent
0-3 years 5.3 Fixed salary 70.9
3-5 years 14.5 Short-term cash bonus 11.7
5-10 years 32.9 Long-term incentives 7.0
10-15 years 23.7 Pension 5.3
> 15 years 23.7 Perks and other 5.1

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 252
distribution indicates that the sample firms are from a wide range of industries, which 
reduces the concern with sample clustering.
Panel B reports demographic information of the sample managers (i.e., survey respondents). 
While various roles are played by sample managers, the largest group consists of general 
managers (29.6%), who are expected to have the most influence over SG&A spending 
for the business unit. Most of the respondents have experience of 3 years or longer either 
at their current position or in the current industry. The mean age was 39 and about two 
thirds of the sample managers were male. On average, total annual compensation was 
$82.6 thousand, which consists of 70.9% of fixed annual salary, 18.7% of short-term or 
long-term incentives, and 10.4% of other types. The large portion of fixed salary suggests 
that the compensation structure of middle managers is very different from that of top 
executives who typically receive significant portions of total compensation as incentives.
7
5 RESULTS
5.1 Quantitative analysis
5.1.1 SG&A cost decisions of middle managers
To gauge the degree to which middle managers are willing to change the overall SG&A 
spending for a given sales change, we asked the following hypothetical question:
Hypothetical question: Assume sales have been increasing for the past five years. How 
much change in SG&A costs would you make under the following situations?
8
1. when sales growth this year is 0%?
2. when sales increase by 5%? 10%? 15%?
3. when sales decrease by 5%? 10%? 15%?
The two extreme situations, 15% increase and 15% decrease, are still considered within 
the normal range of annual sales change, which also means that the responses for these 
scenarios are considered a normal operational decision. The assumption of past sales 
7 Banker, Jin, and Mehta (2018) report that on average, a CEO of a S&P 1500 company receives 68.2% of the total 
compensation in the form of incentives.
8 The survey asked respondents’ decisions regarding SG&A costs, as well as other cost items. The responses for 
SG&A cost, the main cost item in the cost stickiness literature, are separated from others for reporting purposes. 
See Table 3 for responses for the rest of the cost items.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 253
increase was given considering that managers’ positive expectation for future sales is the 
main assumption in the cost stickiness theory (ABJ).
9
Table 2: Survey responses to the question: “How much change in SG&A costs would you make 
under the following situations?”
Note: Table 2 summarizes the survey response to the question “How much change in SG&A costs would you 
make” under various scenarios regarding sales change. Respondents are given the assumption that sales have 
been increasing for the past five years.
“Comparison with prior range” column presents the mean comparison between ranges regarding sales change. 
For ranges of sales increase, it is tested whether the mean SG&A cost change for the range is statistically larger 
than that for the previous sales increase range. (E.g., for the situation of +10% sales change, it is tested whether 
the mean response is statistically greater than the mean response for the +5% sales change.) For ranges of sales 
decrease, it is tested whether the mean SG&A cost change for the range is statistically smaller than that for the 
previous sales decrease range. (E.g., for the situation of -10% sales change, it is tested whether the mean response 
is statistically smaller than the mean response for the -5% sales change.) *, **, and *** denote significance at levels 
of 0.1, 0.05, and 0.01, respectively.
Table 2 presents the summary of the responses. Empirical studies in the cost stickiness 
literature generally use the zero sales change as the point where the slope of the sales-costs 
relation changes, meaning the cost decisions at zero sales growth may serve as a benchmark 
when examining whether the cost behavior is sticky. On average, the respondents indicate 
that they are willing to increase overall SG&A costs by 4.53% even when sales revenue does 
not grow at all in the current period. A potential explanation for this positive cost change 
is that the managers are optimistic and believe the sales will rise in the future. Considering 
9 Prior literature also finds that costs are “anti-sticky” (i.e., costs change relatively more when sales decrease than 
when sales increase) when managers are pessimistic about future sales revenue (Banker et al., 2014).
Change in SG&A costs (%)
Hypothetical situation Mean
Comparison 
with prior 
range
One-tailed 
p-value
25th 
percentile
50th 
percentile 
(median)
75th 
percentile
When sales growth this year 
is 0%
4.53% 0.00% 5.00% 5.00%
When sales increase by …
5% 6.40% +1.87%*** 0.01 0.75% 5.00% 6.00%
10% 7.03% +0.63% 0.31 1.00% 5.00% 7.25%
15% 7.28% +0.26% 0.39 2.00% 5.00% 10.00%
When sales decrease by …
5% 2.78% -1.75%*** < 0.01 0.00% 0.00% 5.00%
10% 2.85% +0.07% 0.54 0.00% 0.00% 5.00%
15% 2.06% -0.79%* 0.07 0.00% 0.00% 5.00%

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 254
the respondents are middle managers, another explanation is that there is a corporate-level 
strategy or policy to follow regarding the minimum level of SG&A spending.
Next, the responses for the scenarios of sales increase indicate that middle managers 
tend to increase overall SG&A spending as expected sales growth increases, as intuitively 
expected. More interestingly, the increase in SG&A cost change is mitigated as sales growth 
increases, suggesting that middle managers increase SG&A spending relatively less when 
the magnitude of sales increase is large compared to when the magnitude of sales increase 
is small. In particular, the mean response was to add 1.87% (= 6.40% - 4.53%) extra SG&A 
spending when sales growth changes from 0% to +5%. However, the extra increase in 
SG&A spending drops to 0.63% (= 7.03% - 6.40%) when sales growth changes from +5% 
to +10% and further drops to 0.25% (= 7.28% - 7.03%) when sales growth changes from 
+10% to +15%. The difference in means was statistically significant only for 0% vs. +5% 
and insignificant at the conventional level of significance for +5% vs. +10% and +10% 
vs. +15%. This is consistent with our expectation based on the characteristics of middle 
management including limited ability in adding resources and risk aversion.
Last, the responses for the scenarios of sales decrease indicate that middle managers tend 
to reduce the increase in overall SG&A spending as sales decrease, again, as intuitively 
expected. Similarly to the case of sales increase, the degree of the SG&A cost change is 
relatively smaller when the sales decrease is large compared to when the sales decrease 
is small. In particular, the extra cut in the SG&A spending was 1.75% (= 4.53% - 2.78%, 
p-value < 0.01) when sales growth changes from 0% to -5%. However, the cut in the 
SG&A cost is substantially mitigated when sales growth drops further. In particular, 
the difference in mean cost changes between -10% and -15% sales growth scenarios is 
statistically insignificant. The additional SG&A cut when sales growth further drops 
from -10% to -15% was 0.79% (= 2.85% - 2.06%, p-value = 0.07), which is insignificant 
at the conventional level of significance (p-value < 0.05) and much smaller in magnitude 
compared to 1.75%, the SG&A cut for the sales growth range between 0% and -5%. The 
relatively smaller decrease in SG&A costs for a large sales decrease is consistent with the 
empirical findings in the prior cost stickiness literature (e.g., ABJ). It is also consistent with 
our expectation based on (1) limited ability of middle managers and (2) risk aversion by 
middle managers.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 255
Figure 2: Sticky SG&A cost decision of middle managers
Note: Figure 2 presents the mean and median survey responses to the question “How much change in SG&A 
costs would you make?” given the sales growth in this year is 0%, +5%, +10%, +15%, -5%, -10%, and -15%. The 
respondents are given the assumption that sales have been increasing for the past five years.
Figure 2 graphically summarizes the non-linear SG&A cost decisions of middle managers 
observed from the survey responses. For the line representing the mean responses, the 
slope is relatively steeper when the sales change is relatively small in magnitude (from 
-5% to +5%) and relatively flatter when the sales change is relatively large in magnitude 
(-5% or lower and +5% or higher). Similarly, the median response of 0% of SG&A cost 
change for -5% sales change does not decrease further when the magnitude of sales 
decrease gets larger and the median response of 5% for zero sales growth does not rise 
when the expected sales growth increases. Overall, the non-linear cost behavior of middle 
managers shown in Figure 2 is consistent with our expectation.
The shape of the two plots in Figure 2 also suggests that while the empirical models in the 
prior cost stickiness literature generally use zero sales growth as the point where the slope 
changes, the change in managerial behavior may not be triggered by a mere sales decrease. 
Figure 2 suggests that it is rather a “sufficient large” sales decrease. More generally, the cost 
behavior at the middle management level can be described as costs changing relatively less 
when the magnitude of sales change (i.e., sales increase or decrease) is sufficiently large.
10
10 The criteria for being “sufficiently large” are not necessarily the same for sales increase and for sales decrease.

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 256
5.1.2 Other cost and investment decisions of middle managers
While the prior literature on cost stickiness focuses on SG&A costs, where managers 
are supposed to have the most discretion, we also examine middle managers’ decisions 
regarding other cost and investment items. Similarly to the main questions about SG&A 
cost decisions, we asked the following question for (1) human resources (i.e., hiring and 
firing), (2) investment in fixed assets (e.g., machine and equipment), and (3) investment 
in intangible assets (e.g., patent and software): 
Hypothetical question: Assume sales have been increasing for the past five years. How 
much change in cost or investment would you make under the following situations?
1. when sales growth this year is 0%?
2. when sales increase by 5%? 10%? 15%?
3. when sales decrease by 5%? 10%? 15%?
For these cost and investment decisions on which managers are supposed to have relatively 
smaller discretion compared to that on SG&A cost decisions, we excluded responses of the 
managers who self-reported that they have weak or no discretion on the corresponding 
decision.
The survey responses summarized in Table 3 and Figure 3 show a pattern very similar 
to that of SG&A cost decisions shown in Table 2 and Figure 2. In specific, the mean 
and median responses show that the change in the cost or investment is less sensitive to 
the change in sales revenue when the magnitude of sales change is relatively large. This 
suggests that first, similarly to the case of SG&A costs, the magnitude of employee layoffs 
or cut in asset investments by middle managers is relatively small when the magnitude 
of sales decline is sufficiently large, consistent with the cost stickiness theory and our 
prediction. Second, also similarly to the case of SG&A costs, middle managers do not 
want to substantially increase the number of employees or investments in assets when 
experiencing a sales boom, which is consistent with our hypothesis.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 257
T able 3: Survey responses to the question: “How much change in cost or investment would you 
make under the following situations?”
Note: Table 3 summarizes survey responses to the question asking the intended level of change in number of 
employees, fixed asset investment, and intangible asset investment. The responses of managers who self-reported 
that they have weak or no discretion on the corresponding cost or investment item are excluded. The number of 
responses is 130 for employment, 117 for fixed asset investment, and 126 for intangible asset investment.
Respondents are given the assumption that sales have been increasing for the past five years.
Figure 3: Employment and asset investment decisions of middle managers
Change in number of 
employees (%)
Change in fixed asset 
investment (%)
Change in intangible 
asset investment (%)
Hypothetical situation Mean Median Mean Median Mean Median
When sales growth this year 
is 0%
6.02% 2.00% 6.24% 4.00% 4.98% 5.00%
When sales increase by …
5% 6.48% 5.00% 5.58% 4.00% 6.40% 5.00%
10% 9.15% 5.00% 7.03% 5.00% 7.03% 5.00%
15% 8.92% 5.00% 7.28% 5.00% 7.28% 5.00%
When sales decrease by …
5% 3.58% 0.00% 2.78% 0.00% 2.78% 0.00%
10% 2.75% 0.00% 2.85% 0.00% 2.85% 0.00%
15% 2.52% 1.00% 2.06% 0.00% 2.06% 0.00%

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 258
Note: Figure 3 presents the mean and median survey responses to the question “How much change in cost or 
investment would you make?” given the sales growth in this year is 0%, +5%, +10%, +15%, -5%, -10%, and -15%. 
The respondents are given the assumption that sales have been increasing for the past five years. Figures 3A, 3B, 
and 3C are for the number of employees, fixed asset investment, and intangible asset investment, respectively.
5.1.3 Subsample analysis of the impact of compensation structure
One of our explanations for the reverse Z-shaped cost behavior at the middle management 
level is that middle managers are likely to be more risk averse than top managers, due 
to their compensation structure which includes a relatively small portion of incentives. 
To test the validity of this explanation, we conducted a subsample analysis. Using the 
median value of total incentives as a percentage of total annual compensation (20.0%), we 
constructed two subsamples and repeated the main analysis described above for each of 
the two subsamples.
11
11 Total incentive is defined as the sum of short-term cash bonus and long-term incentives.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 259
Table 4: Subsample analysis of the impact of the compensation structure
Note: T able 4 presents the results of the subsample analysis performed to examine the impact of the compensation 
structure on cost decisions. Using the median value of total incentives (= cash bonus + long-term incentives) 
as a percentage of total compensation, two subsamples have been constructed. “Comparison with prior range” 
column presents the mean comparison between ranges regarding sales change. For ranges of sales increase, it is 
tested whether the mean SG&A cost change for the range is statistically larger than that for the previous sales 
increase range. (E.g., for the situation of +10% sales change, it is tested whether the mean response is statistically 
greater than the mean response for the +5% sales change.) For ranges of sales decrease, it is tested whether the 
mean SG&A cost change for the range is statistically smaller than that for the previous sales decrease range. (E.g., 
for the situation of -10% sales change, it is tested whether the mean response is statistically smaller than the mean 
response for the -5% sales change.) *, **, and *** denote significance at levels of 0.1, 0.05, and 0.01, respectively.
Figure 4: Subsample analysis of the impact of compensation structure
Change in SG&A costs (%)
Managers with small incentives  
(≤ 20% of total compensation)  
(n = 101)
Managers with large incentives  
(> 20% of total compensation)  
(n = 51)
Hypothetical situation Mean
Comparison 
with prior 
range
50th 
percentile 
(median)
Mean
Comparison 
with prior 
range
50th 
percentile 
(median)
When sales growth this 
year is 0%
4.94% 5.00% 3.73% 2.00%
When sales increase by …
5% 7.06% +2.12%** 5.00% 5.10% +1.37%** 3.00%
10% 7.72% +0.66% 5.00% 5.65% +0.55% 5.00%
15% 7.37% -0.36% 5.00% 7.12% +1.47%** 5.00%
When sales decrease by …
5% 2.45% -2.49%*** 0.00% 3.45% -0.27% 2.00%
10% 2.71% +0.27% 0.00% 3.12% -0.33% 2.00%
15% 2.07% -0.64% 0.00% 2.04% -1.08% 2.00%

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 260
Note: Figure 4 presents the mean and median survey responses to the question “How much change in SG&A costs 
would you make?” for two subsamples constructed based on the compensation structure. The respondents are 
given the assumption that sales have been increasing for the past five years. Figure 4A summarizes the responses 
of the managers who receive equal to or less than 20% of total compensation as incentives. Figure 4B summarizes 
the responses of the managers who receive more than 20% of total compensation as incentives.
T able 4 and Figure 4 present the results of the subsample analysis. For the middle managers 
who receive relatively small incentives (equal to or less than 20% of total compensation), 
the responses remain very similar to those for the main sample (i.e., change in SG&A 
costs is relatively small when the magnitude of sales change is large). On the other hand, 
the responses of the middle managers who receive relatively large incentives (greater than 
20% of total compensation) show that the “sticky” cost behavior at the higher end is less 
significant. In specific, Table 4 shows that the increase in the mean response when sales 
growth increases from 10% to 15% is statistically significant (one-tailed p-value = 0.025), 
suggesting that the increase in SG&A spending is not mitigated even when sales growth 
reaches 15%. The median also rises at least until the sales growth reaches 10%, unlike 
the case for the main sample or the subsample of middle managers with small incentives 
where the median does not increase at all in the range of increasing sales. The difference 
in the cost behavior between the two subsamples can be more easily identified in Figure 
4. Overall, the result of the subsample analysis suggests that middle managers who receive 
compensation relatively more in the form of incentives are less likely to slow down in 
adding resources when experiencing a sales boom, which supports our expectation that 
incentive compensation mitigates the risk-averse behavior of managers.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 261
5.2 Qualitative analysis
5.2.1 Survey
To obtain a better understanding of the cost behavior at middle management level, we also 
asked qualitative questions in the survey in addition to the quantitative questions discussed 
above. First, we asked which factors affected their cost decisions in the quantitative section. 
From the prior literature on cost stickiness, we obtained potential factors as follows:
• Economy
• Company’s past performance
• Long-term relation between company and employees
• Morale of employees
• Short-term cash bonus
• Long-term incentives
• Expenses related to hiring/firing process (e.g., training fees, severance pay)
• Expenses related to machine/equipment (e.g., installation fees, transportation fees)
The question has been asked using a 5-point Likert scale from 1 to 5 (1=No impact, 
2=Minor impact, 3=Neutral, 4=Moderate impact, 5=Major impact). In addition, we also 
asked if there were any other factors which affected their decision-making process.
Figure 5: Factors affecting middle managers’ cost decisions

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 262
Note: Figure 5 summarizes the survey responses regarding factors affecting cost decisions at the middle 
management level. For each factor obtained from the prior literature, respondents were asked to indicate the 
significance of the impact using a 5-point Likert scale (1=No impact, 2=Minor impact, 3=Neutral, 4=Moderate 
impact, 5=Major impact).
Figure 5 summarizes the responses regarding the impact of each factor. Figure 5A shows 
that all the potential factors were identified to have at least a moderate impact by 50% 
or more respondents. A relatively small number of respondents indicated short-term 
cash bonus (50.0%) or long-term incentives (61.2%) as a factor with a major or moderate 
impact, consistent with the fact that only 11.7% and 7.0% of total compensation are 
received in the form of short-term cash bonus and long-term incentives, respectively. 
Figure 5B shows that the most respondents (32.2%) selected the economy as a factor with 
a major impact on their cost decisions, which supports the argument in the prior literature 
that the economic condition affects managers’ belief about permanence of the current 
sales decline, ultimately affecting their cost decisions (ABJ; Banker et al., 2014). Again, a 
relatively small number of respondents (21.1%) chose short-term cash bonus as a factor 
with a major impact on their cost decisions. 
The respondents also indicated that their cost and investment decisions are affected by 
several factors in addition to those provided from the survey. Based on their nature, we 
classified those additional factors as follows:
• Factors restricting middle managers’ cost or investment decisions
 – Annual budget or availability of cash
 – Minimum acceptable rate of return
 – Availability of qualified labor force
 – Long-standing contracts with suppliers
 – Corporate level strategy

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 263
• Other additional factors
 – General trend in business or market
 – Behavior or strategy of main competitor(s)
 – Needs from customers or clients
Consistent with our prediction, many respondents indicated that there are factors which 
limit their cost or investment decisions. First, annual budget and availability of cash 
directly limit the middle managers’ ability to add resources. Also, minimum acceptable 
rate of return, which is often demanded by top managers, forces middle managers to limit 
their expenses to maintain a high return. In addition, middle managers’ employment-
related decisions are also affected by availability of qualified labor force for the current 
period. These factors are likely to set the upper limit in increasing costs, consistent with 
the relatively small increase in costs when the sales increase is large as shown in Table 2 
and Figure 2. On the other hand, long-standing contracts with suppliers are likely to set a 
contractual minimum (i.e., the lower limit) for raw material or merchandise purchase per 
year, resulting in limited ability in cutting resources, consistent with the relatively small 
change in costs when the magnitude of sales decrease is large. Many respondents also 
indicated their decisions are significantly affected by corporate- or top management-level 
strategy such as globalization or increasing market share, which can set either an upward 
limit or a downward limit, depending on its nature.
Respondents also reported additional factors which do not necessarily restrict their 
decisions. Those factors include (1) general trends in the market or industry, (2) strategy 
or behavior of their major competitors, and (3) needs from their clients or customers. 
These responses confirm the widely-accepted fact that management decisions are heavily 
influenced by Porter’s (1979) five forces (i.e., industry rivalry, bargain powers of buyers/
suppliers, threats of new entrants/substitutes).
Last, the survey directly asked the participants if there was any personal or corporate policy 
or strategy to follow regarding the maximum and minimum levels of cost or investment. 
The results summarized in Figure 6 show that a significant number of respondents have 
a certain policy to follow when making cost or investment decisions. In specific, 37.1% 
of valid responses indicated the existence of a personal or corporate policy regarding the 
maximum level of cost or investment. Specific examples include an increase in SG&A 
expenses by a maximum of 5% from the prior period’s expenses, a maximum number of 
line workers limited due to factory or equipment capacity, maximum SG&A spending 
limited to the annual budget, etc. Regarding the minimum level of cost or investment, 
42.3% of valid responses indicated the existence of a restricting policy. Examples include 
an increasing number of temporary workers by 1% every year, not cutting SG&A spending 
regardless of performance, spending all the budget given for the period, etc. Interestingly, 
the annual budget seems to serve as both the upper limit and the lower limit for cost and 
investment decisions.

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 264
Overall, the result of the qualitative analysis suggests that middle managers are likely to 
face the upper limit and/or the lower limit when making a cost or investment decision, 
which explains the reverse Z-shape of cost-sales relation identified from the quantitative 
analysis.
Figure 6: Existence of policy, strategy, or norm regarding the minimum or maximum level of 
annual investment
Note: Figure 6 summarizes the survey responses to the question asking if there is any policy, strategy, or norm 
regarding the minimum or maximum level of annual investment. Many of the respondents who answered “Y es” 
to the question also provided a description of the policy or strategy. The examples of policies for the maximum 
level include (1) the increase in SG&A cost limited to a certain percentage of prior SG&A costs and (2) the 
maximum number of line workers limited due to the factory capacity. The examples for the minimum level 
include (1) not cutting SG&A cost regardless of the current performance and (2) spending all the budget given 
for the period.
5.2.2 Interview
To obtain an even deeper understanding of the decision-making mechanism at the middle 
management level, we conducted interviews with two middle managers currently in 

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 265
practice, who were selected and approached using our personal network; Manager A is 
a director of client services at a company which provides seismic data to the oil and gas 
industry; Manager B is a production manager at a manufacturer of custom molded plastic 
parts. As a part of the briefing, our survey questionnaires were provided to each of the 
interviewees and the actual interviews were conducted a few days later through telephone. 
Similarly to the survey respondents, both of the interviewees indicated that their decisions 
to add or cut resources are affected by top management and/or other factors, although the 
degree varies.
Manager A, who self-reported that he has “a great deal of discretion” in terms of spending 
and resource allocation, stated:
“If I think a $500 resource is needed for an operation or a project, I simply spend the 
capital and continue. However, if the resource needed approaches the $10,000 mark, 
I send it to upper management for confirmation before executing the order … My 
discretion range to give raises (to the employees) is 3-5%, without consulting or push-
back from top management. If I want to consider an employee for a 10% raise, then this 
requires approval at the executive level and from upper management. ”
Similarly, Manager B, who exercises a “moderate level of discretion” in terms of spending 
and human resource allocation, stated:
“(SG&A spending) is rarely my complete decision but rather the committee’s that I 
work and consult with. I need to go through upper management for most of the major 
decisions. ”
These statements suggest that their managerial decisions to increase spending are limited 
by top management, although the degree varies, which is consistent with the survey 
responses in general.
Regarding the factors affecting their resource allocation decisions, Manager A stated:
“W e are in a “sales driven” business and have to maintain an operation that can react and 
bring a deal to fruition within a quick delivery window, closing out the few competitors 
we do have. There are about ten other companies we compete with domestically, so this 
makes it easy for customers to work with us, as they know who has the services in this 
field. ”
This implies that competitors and customers are limiting his discretion in cutting 
resources to a certain degree, as many survey respondents also indicated. On the other 
hand, Manager B stressed the significant influence of company-level strategy:

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 266
“Prior to 2009, the company was in a growth stage as was the industry (and thus my 
discretion in cutting resources was limited) … On the contrary, subsequent to the 2009 
economic upheaval, the industry, and my company as well, have yet to truly recover 
from the recession (meaning my discretion in increasing costs is somewhat limited.)”
To summarize, the interview statements are consistent with our intuition and observation 
from the survey. Although the real world decision making processes, identified during the 
interviews, are much more complicated and dynamic compared to the simplified plots 
we have drawn from the survey results, the interviews confirmed at least that middle 
managers’ discretion in spending decisions is limited both upward and downward and the 
limiting factors include top managers and their strategies.
5.3 Empirical analysis
Middle managers include heads of business segments, such as division managers and 
regional managers, who can be reasonably considered to have the most significant influence 
on the segment level cost decisions. As such, we also conducted an empirical analysis using 
segment level data obtained from Compustat, which covers all publicly traded companies 
in the U.S., to complement our findings from the survey and field interviews. Our sample 
period spans fiscal years 2008–2015 and the number of segment/year observations was 
26,050.
12
Cost behavior at the middle management (or segment) level was examined using the 
following regression model:
ΔSG&A
t
 = β
0
 + β
1
 ΔREV
t
 + β
2
 DEC
t
 × ΔREV
t
 + β
3
 DEC
t
 × ΔREV
t
 × SUCCESSIVE_DEC
t  
 + β
4
 DEC
t
 × ΔREV
t
 × ASSETINT
t
 + β
5
 LARGE_INC
t
 × ΔREV
t
  
 + Industry/Year Fixed Effects (1)
where ΔSG&A is natural logarithm of current SG&A costs over prior SG&A costs and 
ΔREV is natural logarithm of current sales revenue over prior sales revenue. Both ΔSG&A 
and ΔREV are winsorized at the 1% level. DEC is a dummy variable which takes the value 
of 1 if sales revenue of the firm decreases in the current period, and 0 otherwise. Similar 
to ABJ, a negative β2 would indicate that costs decrease relatively less when sales decrease. 
We also include interaction terms containing a dummy variable for successive sales 
decrease (SUCCESSIVE_DEC = 1 if sales decrease for two consecutive years) and asset 
intensity ( ASSETINT = log (total assets / sales revenue)), considering the factors affecting 
the degree of cost stickiness. We use dummy variables based on the two-digit Standard 
Industry Classification (SIC) codes and year dummies to control for the industry and year 
fixed effects, respectively. The main variable of interest is the interaction term containing 
12 Our sample period spans 8 years (2008-2015), since our data source, Compustat’s Current Segments database, 
provides information for the past 8 years.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 267
LARGE_INC, a dummy variable for a large sales increase, which is defined using different 
values of sales increase. (See Note for Table 5 for detailed variable definitions.) A negative 
β
5
 would indicate that SG&A costs become sticky when the magnitude of sales increase 
reaches a given level of sales increase.
Table 5: Regression analysis of SG&A cost behavior at the segment level
Note: Table 5 presents the results of the multivariate regression analysis based on 26,050 segment/year 
observations.
*, **, and *** denote significance at levels of 0.1, 0.05, and 0.01, respectively. T-statistics are in parentheses.
SG&A
t
 = Selling, general, and administrative costs in year t (in million $); ΔSG&A
t
 = Log (SG&A
t
 / SG&A
t-1
); 
REV
t
 = Sales revenue in year t (in million $); ΔREV
t
 = Log (REV
t
 / REV
t-1
); DEC
t
 = 1 if REV
t
 < REV
t-1
, = 0 
otherwise; SUCCESSIVE_DEC
t
 = 1 if REV
t-1
 < REV
t-2
, = 0 otherwise; TA
t
 = Total assets (in million $); ASSETINT
t
 
= Log (TA
t 
/ REV
t
); LARGE_INC15
t
 = 1 if ΔREV
t
 > 0.15, = 0 otherwise; LARGE_INC20
t
 = 1 if ΔREV
t
 > 0.20, = 0 
otherwise; LARGE_INC25
t
 = 1 if ΔREV
t 
> 0.25, = 0 otherwise; LARGE_INC30
t
 = 1 if ΔREV
t
 > 0.30, = 0 otherwise.
(1) (2) (3) (4) (5)
V ARIABLES ΔSG&A
t
ΔSG&A
t
ΔSG&A
t
ΔSG&A
t
ΔSG&A
t
ΔREV
t
0.403*** 0.341*** 0.424*** 0.487*** 0.537***
(68.93) (9.67) (14.07) (18.68) (23.30)
DEC
t
×ΔREV
t
-0.093*** -0.029 -0.115*** -0.182*** -0.238***
(-6.59) (-0.74) (-3.37) (-5.96) (-8.50)
DEC
t
×ΔREV
t
×SUCCESSIVE_DEC
t
0.093*** 0.094*** 0.093*** 0.093*** 0.092***
(6.26) (6.29) (6.25) (6.21) (6.18)
DEC
t
×ΔREV
t
×ASSETINT
t
-0.046*** -0.047*** -0.046*** -0.046*** -0.045***
(-15.31) (-15.40) (-15.18) (-14.94) (-14.68)
LARGE_INC15
t
×ΔREV
t
0.061*
(1.79)
LARGE_INC20
t
×ΔREV
t
-0.021
(-0.72)
LARGE_INC25
t
×ΔREV
t
-0.083***
(-3.30)
LARGE_INC30
t
×ΔREV
t
-0.133***
(-6.01)
Constant 0.033*** 0.035*** 0.032*** 0.029*** 0.025***
(13.78) (13.57) (12.21) (10.65) (9.08)
Industry/Y ear Fixed Effects Included Included Included Included Included
Observations 26,050 26,050 26,050 26,050 26,050
Adjusted R-squared 0.217 0.217 0.217 0.218 0.218

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 268
The regression results are presented in Table 5. Consistent with the prior literature, the 
coefficient on DEC×ΔREV is significant and negative in general, indicating that cost 
becomes sticky when sales decrease. The coefficient on SUCCESSIVE_DEC interaction 
term is significant and positive in general, suggesting a lower degree of SG&A cost 
stickiness at the lower end when sales decline for two consecutive years. The significant 
and negative coefficients on ASSETINT interaction term indicate that SG&A costs are 
stickier at the lower end for firms that require relatively more assets to support their sales.
Most interestingly, the coefficients on the interaction term for a large sales increase show 
that cost becomes sticky when the magnitude of sales increase is “sufficiently” large. In 
specific, the coefficients are not significantly negative when the sufficiently large sales 
increase is defined as ΔREV of 0.15 or higher (Column (2)) or 0.2 or higher (Column (3)), 
suggesting that a sales increase up to about 20% does not trigger the cost stickiness at the 
higher end. The coefficient becomes significantly negative when the sufficiently large sales 
increase is defined as ΔREV of 0.25 or higher (Column (4)), suggesting that approximately 
25% change in sales revenue is sufficiently large to induce sticky cost behavior at the 
higher end. Considering that a significant portion of the sample (20.9%) has ΔREV of 0.25 
or higher (untabulated), the conditions that trigger sticky cost behavior at the higher end 
(e.g., 25% sales increase) are still considered normal rather than extreme. The negative 
coefficient becomes even more significant and larger in magnitude when ΔREV of 0.3 
is used to define the dummy variable (Column (5)), as intuitively expected. Overall, the 
regression results based on segment level data suggest that cost behavior at the segment 
level is sticky not only when sales decrease but also when the magnitude of sales increase is 
large, consistent with our findings from the survey instrument and the interviews.
6 DISCUSSION WITH CONCLUSIONS
6.1 Theoretical contributions
Decisions at the middle management level are different from those at the top management 
or corporate level because middle managers are likely to have limited ability in both adding 
and cutting resources and also because the salary-focused compensation structure for 
middle managers are likely to induce more risk-averse behavior. In this study, we examine 
cost behavior at the middle management level using two different approaches. 
First, we take a behavioral approach and conduct a survey and field interviews. The analysis 
results based on the detailed interviews and 152 survey responses indicate that middle 
managers’ cost decisions are sticky (i.e., change relatively less) when the magnitude of sales 
change is sufficiently large at both increasing and decreasing ends. Our findings contribute 
to the prior literature on cost stickiness by suggesting the existence of stickiness at the 
higher end (i.e., when the sales increase is large) at least at the middle management level 
and also by confirming the empirical findings in the literature using behavior approaches. 

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 269
Second, we use archival data to empirically confirm our findings from the survey and the 
interviews. Using a regression analysis based on 26,050 segment-level observations for 
publicly traded companies in the U.S., we show that cost decisions at the segment level 
are sticky at both low and high ends, consistent with our findings from the survey and the 
interviews. Using segment level data also contributes to the prior literature which relies 
heavily on company level data and examines the cost asymmetry at the low end only (i.e., 
firms facing a sales decline).
6.2 Practical implications
Middle managers’ cost decisions, which are sticky not only when sales decrease but 
also when the magnitude of sales increase is large, have practical implications for both 
top managers and investors. For top managers, the sticky cost behavior at the high end 
suggests that the cost decisions of middle managers are restricted by annual budgets and 
corporate-level strategies or policies, as evidenced by the survey results and the interviews. 
This further suggests that a company may face an undesirable situation of losing an 
opportunity to grow because investments or expenditures at the middle management level 
are restricted for internal reasons.
For investors and analysts, the sticky cost behavior at the high end suggests that analysts’ 
earnings forecasts are likely to be biased when the magnitude of sales increase is large. 
Banker, Jin, and Mehta (2018) argue that if analysts fail to fully consider the cost stickiness 
(at the low end), costs of firms facing sales decline will be under-forecasted, and, by 
extension, earnings of those firms will be over-forecasted. In contrast, the cost stickiness 
at the high end that is documented in this study suggests that costs will be over-forecasted 
and thus earnings will be under-forecasted for firms facing a large increase in sales. 
6.3 Limitations with future research directions
As this study mainly uses a survey instrument and interviews, it is subject to potential 
caveats associated with behavioral studies, such as biased inputs from the survey/interview 
respondents and/or samples not representative of the whole population. To mitigate this 
concern, we also conduct an empirical analysis using archival data for publicly traded 
companies in the U.S.
Another limitation in our study is that while we show that middle managers’ cost decisions 
are sticky when the magnitude of sales increase is sufficiently large, whether the corporate-
level cost behavior is also sticky at the higher end remains untested. This suggests that 
examining the corporate-level cost behavior at the high end will be an interesting venue 
for future research.
Also, our survey and interview responses suggest that Porter’s (1979) five forces have 
significant influence on cost and investment decisions, consistent with the common belief 

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 270
in the management literature. This suggests that it will be interesting and thus worth 
exploring to examine how the five forces affect non-linearity in cost decisions individually 
and collectively.
REFERENCES
Anderson, M. C., Banker, R. D., & Janakiraman, S. N. (2003). Are selling, general, and 
administrative costs “sticky”?. Journal of Accounting Research, 41 (1), 47-63.
Balakrishnan, R., Labro, E., & Soderstrom, N. S. (2014). Cost structure and sticky costs. 
Journal of Management Accounting Research, 26 (2), 91-116.
Balakrishnan, R., Petersen, M. J., & Soderstrom, N. S. (2004). Does capacity utilization 
affect the “stickiness” of cost?. Journal of Accounting, Auditing & Finance, 19 (3), 283-300.
Banker, R. D., & Byzalov, D. (2014). Asymmetric cost behavior. Journal of Management 
Accounting Research, 26 (2), 43-79.
Banker, R. D., Byzalov, D., & Chen, L. T. (2013). Employment protection legislation, 
adjustment costs and cross-country differences in cost behavior. Journal of Accounting and 
Economics, 55(1), 111-127.
Banker, R. D., Byzalov, D., Ciftci, M., & Mashruwala, R. (2014). The moderating effect 
of prior sales changes on asymmetric cost behavior. Journal of Management Accounting 
Research, 26 (2), 221-242.
Banker, R.D., Jin, B., & Mehta, M. (2018) S hort-term Bonus for CEOs and Cost Stickiness 
(previously titled CEO Compensation and Cost Structure ), Working Paper, Temple 
University [online] http://www.fox.temple.edu/cms/wp-content/uploads/2013/08 /
Byunghoon Jin.pdf
Belcher, D. W ., & Atchison, T. J. (1987). Compensation Administration . Prentice Hall.
Burgelman, R. A. (1983). A process model of internal corporate venturing in the diversified 
major firm. Administrative Science Quarterly , 223-244.
Chen, C. X., Lu, H., & Sougiannis, T. (2012). The agency problem, corporate governance, 
and the asymmetrical behavior of selling, general, and administrative costs. Contemporary 
Accounting Research, 29 (1), 252-282.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 271
DeFusco, R. A., Johnson, R. R., & Zorn, T. S. (1990). The effect of executive stock option 
plans on stockholders and bondholders. The Journal of Finance, 45 (2), 617-627.
Delmestri, G., & Walgenbach, P. (2005). Mastering techniques or brokering knowledge? 
Middle managers in Germany, Great Britain and Italy. Organization Studies, 26 (2), 197-
220.
Dierynck, B., Landsman, W . R., & Renders, A. (2012). Do managerial incentives drive cost 
behavior? Evidence about the role of the zero earnings benchmark for labor cost behavior 
in private Belgian firms. The Accounting Review, 87 (4), 1219-1246.
Dutton, J. E., & Ashford, S. J. (1993). Selling issues to top management. Academy of 
Management Review, 18(3), 397-428.
Dutton, J. E., Ashford, S. J., O'neill, R. M., Hayes, E., & Wierba, E. E. (1997). Reading the 
wind: How middle managers assess the context for selling issues to top managers. Strategic 
Management Journal, 407-423.
Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of 
Management Review, 14(1), 57-74.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The Journal of 
Law and Economics, 26(2), 301-325.
Floyd, S. W ., & Wooldridge, B. (1992a). Middle management involvement in strategy and 
its association with strategic type: A research note. Strategic Management Journal, 13 (S1), 
153-167.
Floyd, S. W ., & Wooldridge, B. (1992b). Managing strategic consensus: the foundation of 
effective implementation. The Executive, 6 (4), 27-39.
Floyd, S. W., & Wooldridge, B. (1994). Dinosaurs or dynamos? Recognizing middle 
management's strategic role. The Academy of Management Executive, 8 (4), 47-57.
Floyd, S. W., & Wooldridge, B. (1997). Middle management’s strategic influence and 
organizational performance. Journal of Management Studies, 34 (3), 465-485.
Floyd, S. W ., & W ooldridge, B. (1999). Knowledge creation and social networks in corporate 
entrepreneurship: The renewal of organizational capability. Entrepreneurship Theory and 
Practice, 23(3), 123-144.

ECONOMIC AND BUSINESS REVIEW | VOl. 21 | No. 2 | 2019 272
Gomez-Mejia, L. R., & Balkin, D. B. (1992). Determinants of faculty pay: An agency theory 
perspective. Academy of Management journal, 35(5), 921-955.
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate 
financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73.
Huy, Q. N. (2001). In praise of middle managers. Harvard Business Review, 79(8), 72-9.
Huy, Q. N. (2002). Emotional balancing of organizational continuity and radical change: 
The contribution of middle managers. Administrative Science Quarterly, 47 (1), 31-69.
Jensen, M. C., & Meckling, W . H. (1976). Theory of the firm: Managerial behavior, agency 
costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Kama, I., & Weiss, D. (2013). Do earnings targets and managerial incentives affect sticky 
costs?. Journal of Accounting Research, 51 (1), 201-224.
Kanter, R. M. (1982). The middle manager as innovator. Harvard Business Review, 60(4), 
95-105.
Kanter, R.M. (1988). When a thousand flowers bloom: structural, collective, and social 
conditions for innovation in organization. Research in Organizational Behavior , Vol. 10, 
169–211.
Likert, R. (1961). New Patterns of Management , McGraw-Hill, NY .
Mueller, D. (2003). The Corporation: Growth, Diversification and Mergers . Routledge.
Murphy, K. J. (1999). Executive Compensation. Handbook of Labor Economics, O. 
Ashenfelter and D. Card, eds.
Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review, 
21-38.
Rajgopal, S., & Shevlin, T . (2002). Empirical evidence on the relation between stock option 
compensation and risk taking. Journal of Accounting and Economics, 33(2), 145-171.
Shimizu, K. (2012). Risks of corporate entrepreneurship: Autonomy and agency issues. 
Organization Science, 23(1), 194-206.

B. JIN, J. C CARY | ARE MIDDLE MANAGER'S COST DECISIONS STICKY? EVIDENCE ... 273
W estley, F . R. (1990). Middle managers and strategy: Microdynamics of inclusion. Strategic 
Management Journal, 11(5), 337-351.
Williamson, O.E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. 
Free Press, NY .
Wooldridge, B., & Floyd, S. W. (1990). The strategy process, middle management 
involvement, and organizational performance. Strategic Management Journal, 11 (3), 231-
241.